Big question

BIG question In an ever-changing landscape, is gambling regulation DIGITAL PAYMENTS hindering innovation in digital payments?

WORLDPAY

Steffan Jones, commercial VP, gaming and trading, Worldpay, gives his views on the effect regulation in payments can have on product enhancement for payments solutions in gambling

Steffan Jones

BIGGEST REGULATORY CHALLENGES

Broadly, the challenges are split over how you adapt and how you plan for changes in behaviour, which are driven by many things. There’s technological advances, and consumer preferences changing and adapting, and the spending behaviours that go with that.

Then there’s merchant or operator changes that come into effect. Regulatory changes as well. All of them are interwoven, which are driving through different push and pull factors making things quite challenging and stimulating when it comes to planning what you’re going to deliver for the future.

THE EFFECT OF REGULATION ON INNOVATION

Regulation and the effect it has on innovation is a fascinating topic. There are different factors that need to be considered that will depend on if regulation stimulates innovation or not. Some of those include if the regulation that comes in is really prescriptive, or if it’s quite flexible, which can engender a greater sense of creativity. Then you start seeing better and more innovative products being built.

For payments, the new piece of regulation that will be fully rolled out next year is the payments service directive (PSD2), which centres on payment service providers within Europe. There’s two main facets with it: access to bank accounts and strong consumer authentication.

When looking at the latter, this effectively means there’s been a significant portion of fraud in the online world, with the operational service that sits behind it costing well into billions of dollars a year. PSD2 directly seeks to reduce that by having certain requirements to bolster the level of security behind any online payment. That in itself is quite a big piece for any payment services provider because they would have to conform with that in order for transactions to go through. However, there’s innovation embedded within, which companies like Worldpay are very much engaged with to say how can we build products and services that help meet those requirements, but also help our merchants and operators in the gambling industry. Then they get the benefits of the reduced level of fraud, but also still make it as easy as possible for transactions to be processed in a seamless manner.

PROMOTING INNOVATION

Regulation can create an environment that promotes innovation. Another element of PSD2 is access to accounts. Right now, you might think your bank account has been the preserve of the bank that issued it. In simple terms, this second instalment means banks actually have to enable accredited access to your bank to other providers to be able to offer services to consumers and operators.

Worldpay has a service that will be able to offer operators an access where you can pay through your bank account by bank transfer in real-time, but also meet all the requirements of strong consumer authentication, which can be cheaper than previous methods for the operator.

It can be quicker with very little risk of fraud, which has come about directly from this regulation mandating these services and creating an arena where payment providers can operate within that can boost customer experience and operator’s revenue.

HOLISTIC APPROACH TO JUDGING REGULATION

There’s an opportunity with any regulation for innovation; it doesn’t have to hinder it. In my own view, it’s not as easy as does it or doesn’t it. It depends on the elements.

It’s something you need to look at more holistically than just a yes or no answer. It’s more nuanced and there are areas you can say it’s quite hard to innovate. If you think about local licensing requirements in gambling, which is very big, that can be a hard area to innovate in, but operators have to conform to that.

It’s not for me to speculate if that’s good or bad; that’s just what they have to do to comply. That, and all the obligations that go alongside it, might be for the operator to say the effort to do that could potentially have an effect on their ability to innovate in other areas. That could be the case from an operator’s point of view but from what we’ve seen, regulation can innovate and offer the opportunity for innovative products, which can be the benefit to operators and competition.

CONNECTPAY

Agne Selemonaite, ConnectPay deputy CEO, talks about how regulation could potentially slow down progress, and how industry development, in both payments and gambling, is at the mercy of regulators

Agne Selemonaite

Innovation continues to shape today’s technology-driven market. However, the pace at which it evolves doesn’t rely solely on business endeavours. Any implementation of new ideas that could possibly accelerate progress first must be in compliance with the regulatory systems. Consequently, this inherently slows down the process and raises the question: Is it possible to make significant progression leaps under strict regulation?

When it comes to digital payments, the market is at a crossroads. Evidently, the regulatory process is a necessity, needed to uphold distinctive standards and reinforce transparency. So it’s essential that the groundwork it provides enables to run a smooth business, as propitious conditions also act as a catalyst for innovation, which leads the industry forward.

We live in an innovation-based economy and although regulation is necessary, often policy changes are simply not as fast-paced as the growth of the digital market. Being able to cut through this red tape could provide more flexibility and the way to do that is by encouraging two-way dialogue between the regulators and the companies directly affected by regulatory laws.

We’re fortunate to work with one of the most progressive regulators in the EU – the Bank of Lithuania, whose innovative approach continues to drive the industry forward. Recently, it partnered with leading industry fintechs, including ConnectPay, and developed a prototype of a smart regulation solution (regtech), that will automate the reporting of financial institutions. We’re proud to have been part of this project as it shows how collaboration between regulators and ventures can present a diligent product beneficial to all market players.

Regtech industry is reliant on innovative solutions that the fintechs can develop, so the relationship should be mutually fostered. Fintechs are not corporate banks. By definition, they are innovators powered by tech, so they rely on flexible and agile work processes. That’s why we strongly believe in the open book policy; consistent data sharing can encourage more in-depth conversations with the regulators, which, in turn, can lead to developing more innovative solutions.

Since the gambling industry is evolving so fast, compliance monitoring should adapt at a swifter pace too. Implementing constant monitoring, rather than yearly inspections, would enable regulators to better evaluate real-time conditions and make timely decisions. Focusing not only on the retrospective, but the matters at hand, could lead to a more fruitful collaboration and development-fostering environment.

Although the standards are there to navigate businesses towards sustainability-oriented goals, they can also reduce incentives to innovate; authorities often fail to account for all of the consequences new policies will have, like the implementation costs of compliance solutions.

Since the financial crisis in ’08, the operating costs spent on compliance have risen by over 60%. Paired with the rapidly increasing regulatory expectations and the continuous release of new rules for all FSIs, this has created a more complex environment to keep up with and innovate within.

Nevertheless, regulation plays an essential role in maintaining market order and challenging organisations to think about the bigger picture. A good example would be the SEPA initiative, which set a new industry standard by introducing standardised payment schemes across Europe and opened up immense new prospects for businesses.

Considering all the above, industry development, especially in the gaming space, seems to be dependent on compliance authorities, though the matter is not nearly as straightforward. At times, the market is affected not by the laws per se, but rather how the organisations interpret them. The problem is they’re riddled with vague statements like “must assure” and “actuality of documents”, leaving a lot of room for interpretation (or error). In addition, regulators often approach situations differently as they do not share the same hands-on experience as mature market players. This complicates policy assessment, as not all possible outcomes are factored in. This affects many industries, including gambling. In the end, you only have a “best guess” solution, expecting it conforms to the given guidelines.

The truth is there are no “foes” or “allies” here, as we are on the same side, creating an innovation-nurturing market. Regulatory support plays an invaluable part in the matter, as it shares the mutual need to maintain a sustainable business environment.

CRYPTOPROCESSING

With cash use decreasing in a post-COVID world, Max Krupyshev, Cryptoprocessing CEO, discusses the negative impact of certain regulation, and the potential emergence of digital currencies

Max Krupyshev

Experts predict that the coronavirus outbreak will speed up the transition to digital payments by up to 10%. As more people pay online using digital wallets and cryptocurrency, the regulatory pressure also increases. Merchants, especially gaming operators, are facing a tough challenge: meeting their customers’ expectations and complying with regulations at the same time.

The COVID-19 pandemic has dealt a heavy blow to cash payments. According to the research firm Bain & Company's pre-COVID estimate, online transactions were supposed to account for 57% of the total value of transactions by 2025. The updated forecast is 67%.

People are worried about handling banknotes and coins, which can carry the virus. In addition to that, we’re shopping more online to avoid crowds in brick-and-mortar stores. Entertainment, too, is moving online – especially gambling.

THE COMPLEX CYCLE OF REGULATION AND INNOVATION

The more we use digital means of payment, the bigger the danger of falling victim to fraud. Increased risks lead to even more efforts on behalf of the financial regulators to control the payments industry. This, in turn, makes life difficult for many merchants and payment companies, which can't easily comply with the new rules.

Some of the new laws can achieve the opposite of what regulators intended. PSD2 is a good case in point. When it was introduced in the EU in September 2019, it was hailed as a revolution in online payments. The idea was to promote competition and innovation, and at the same time protect customers.

However, the implementation of PSD2 actually created new risks. The Open Banking model with its system of data sharing between banks and third-party payment services opens up ample possibilities for cybercriminals, phishers and scammers of all types. For example, they can pose as fintech companies collaborating with banks to steal users’ financial data.

The result is that merchants and payment service providers (PSPs) have to look for new ways to accept payments that will protect them both from fraudsters and from the excesses of regulation. There is irony in this situation: the government tries to promote innovation through laws, but actual innovation happens to overcome the negative effects of these laws.

THE SPECIAL CASE OF GAMBLING

Online gaming is one of the most closely monitored industries – and at the same time one of the most competitive. This puts online casino operators in a uniquely difficult position.

Players expect their deposits and withdrawals to be smooth and fast. By some estimates, over half of card transactions on online gaming sites are declined by the bank. However, it’s the casino that customers usually blame.

Digital wallets used to be the go-to solution, but even they can't be relied upon anymore. After the UK imposed a ban on gambling with credit cards, the leading payment app Revolut also announced that its users wouldn't be able to use the Revolut cards on online gaming sites.

Things are even more difficult in the US, where the majority of European e-wallets aren’t available. There, most online casino payouts are handled through ACH (Automatic Clearing House) payments, which can take up to five days to clear.

HAS THE TIME OF CREDIT CARDS PASSED?

Digital currencies, such as Bitcoin, provide an attractive alternative, and over 100 online operators have already integrated cryptocurrency payments. Players appreciate the speed, privacy and low costs associated with crypto.

However, many are still cautious about accepting Bitcoin and other cryptocurrencies. The key concerns include the risks of accepting “dirty” coins, potential issues with the regulators and the difficulties of converting crypto revenue into cash.

This reluctance stems from a lack of awareness, not from any actual weaknesses in the framework. Crypto payment processing has evolved enormously in the past couple of years. Any suspicious transaction is immediately flagged, but it’s virtually impossible for a bona fide payment to get blocked. It’s actually much harder to launder money or conduct fraud in crypto than it is in fiat.

In the “new normal” of a post-COVID world, digital payment innovation will speed up. However, it won’t be in the way that regulators envisaged. As traditional means of online payment fail to meet customers' expectations, new ones – such as digital currency – will take centre stage. Instead of banks sharing user data with fintech apps, users will move away from banks altogether, embracing faster, cheaper and more private payment options.

IDNOW

With digital payments fast becoming a key part of our online lives, IDnow head of regulatory affairs, Rayissa Armata, discusses the importance of adhering to regulations to keep customers safe

Rayissa Armata

Innovation and technology have brought traditional markets into the digital realm. Over at least the last decade, transportation, entertainment, travel, hospitality, media and retail, among others, have transformed across much of the world. High-security sectors like banking, financial services and gambling, though traditionally heavily regulated industries, are no exceptions.

Granted, sectors like finance and banking, as well as online gambling, have been slower and more cautious by nature to adopt emerging technologies because security is a major factor for them. However, the growth of digital payments as a platform has picked up significantly with new vehicles for adoption. According to Statista and Forbes magazine, e-commerce payments are projected to reach $6.54 billion by 2023. The fintech industry’s discovery of more ways to intertwine with our daily lives means that it will no longer be a standalone sector. In fact, fintech is commonly described as the “fourth platform”, alongside the internet, the smartphone and cloud-based solutions. This is a disruptive element in commerce, and this new world requires a new set of rules.

Digital payment platforms are now well on their way to becoming a core part of nearly all online lives. Regulations have played a vital role in upholding transparency, portability and security. It’s also interesting to see how these regulatory rules, mixed with market dynamics, impact businesses. Companies either follow the rules or shut down. It’s truly survival of the fittest in the fintech world.

Regulations and technology trends that have emerged from this wave have impacted other sectors as well. The last several years have produced financial reforms, notably in laws such as anti-money laundering laws (AML), stricter data privacy laws (GDPR), and new compliance requirements that enable traditional banking to integrate with new technologies, such as PSD2. These terms have become ubiquitous in the industry.

As we align digitally, the most valuable feature of this world will be accessing more data safely by keeping it transparent and secure. The role of the regulator will be paramount to protecting customers’ data and protecting against the increasing strength of cybercrime. Ultimately, regulators expect the industry to adhere to rules and avoid risk. Smart regulations, like Europe’s General Data Protection Regulation (GDPR), have slowed growth only at the pace that providers can adhere to standards. The industry’s robust growth and significant venture capital investment in fintech, regtech products and services go to smart players such as IDnow, for example.

MAKING THE CONNECTED WORLD A SAFER PLACE

Our focus and primary business is still protective in orientation. Our maxim is “making the connected world a safer place”, and we make our strategy accordingly.

A framework for smart regulation must maintain secure and broader options for companies to integrate new solutions, while at the same time, protect users. An industry which fails in compliance risks hundreds of billions in fines. In comparison, the threat of cyberattacks is predicted by various cyber threat analysts like Intsights and will cost the financial industry quite possibly several hundred billions by 2021. More than any other industry, 25% of all malware attacks hit banks and other financial services organisations, and in 2019 there were year-on-year increases in attacks with credit cards by 212%, credential leaks by 129% and malicious apps by 102%.

The steady climb of digital payments has prompted stricter regulations and a rise in costs. Technology solutions companies are taking compliance to a whole new playing field. One of the foremost challenges to digital finance is finding ways to combat the ever sophisticated and ever-evolving dangers of cybercrime. We’ve built effective solutions with the highest levels of certification in order to continually find countermeasures against such attacks. Our work not only supports an industry with top-of-the line solutions that prevent data breaches, but we also find new ways to support public institutions charged with protecting its citizens.